Uluslararası Yönetim İktisat ve İşletme Dergisi, Cilt 8, Sayı 16, 2012
Int. Journal of Management Economics and Business, Vol. 8, No. 16, 2012
COMPARISONS BETWEEN THE LONG DEPRESSION, THE
GREAT DEPRESSION and THE GLOBAL FINANCIAL CRISIS
Yrd.Doç.Dr. Selçuk BALI
Ordu Üniversitesi
MYO, Muhasebe ve Vergi Bölümü
[email protected]
ABSTRACT
Depressions are prolonged periods of economic downturns often characterised
by a rise in unemployment, general fall in commodity prices, lower production levels
and in many cases, lack of credit facilities or borrower apathy. Depressions are in
many cases triggered by events in a specific economy or a limited number of economies
even though their effects tend to transcend the national borders of the economies in
question. Three of the most acclaimed depressions that have had a global effect include
the Long Depression, the Great Depression, and ongoing the Global Financial Crisis.
This paper undertakes to explain the causes of such depressions. It focuses on their
origins, their durations as well as the impact of such depressions on the different
economies around the world. The paper also draws similarities and differences between
the three global depressions as well as the actions taken to end them while highlighting
the influence of politics in shaping the events before, during and after the depressions.
Keywords: Long Depression, Great Depression, Global Financial Crisis
UZUN BUHRAN, BÜYÜK BUHRAN ve KÜRESEL FİNANSAL KRİZ’İN
KARŞILAŞTIRILMASI
ÖZET
Ekonomik buhran, genellikle beraberinde işsizliğin artması, emtia fiyatlarının
düşmesi, üretimin azalması ve birçok durumda kredi imkânlarının azalması veya borç
alanların ilgisizliğini de getiren uzun süreli ekonomik durgunluktur. Ekonomik
buhranlar genellikle bir veya birkaç ülke ekonomisindeki olaylar tarafından tetiklense
de, buhranın etkileri söz konusu ülkelerin sınırlarını aşar. Küresel bir etki yaratmış
olan ve tarihsel olarak en çok öne çıkan ekonomik buhranlardan üçü Uzun Buhran,
Büyük Buhran ve devam etmekte olan Küresel Finansal Kriz’dir. Bu makalede
sözkonusu bunalımların temel sebepleri ele alınarak, söz konusu ekonomik bunalımların
kaynakları, süreleri ve farklı ülke ekonomileri üzerindeki etkileri incelenmeye
çalışılacaktır. Makalede ayrıca küresel çapta yaşanmış ve yaşanmakta olan bu üç
ekonomik buhran arasındaki benzerlikler ve farklılıklar ile bu buhranları son erdirmek
için alınan önlemler ele alınacak, politikanın buhran öncesinde, esnasında ve
sonrasındaki etkilerine dikkat çekilecektir.
Anahtar Kelimeler: Uzun Buhran, Büyük Buhran, Küresel Finansal Kriz
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Selçuk BALI
1. Introduction
A depression in economic terms can be described as a period prolonged
economic downturn in an economy. Depressions must be distinguished from recessions.
Recessions are normal short-lived dips in economic activity and are often no reason for
concern (Frank and Bernanke, 2007). A recession becomes a depression when it fails to
recover within the acceptable periods of time. Several depressions have affected
economies across the world with their impacts mostly being felt in the developed world.
Three notable global depressions include the Long Depression, the Great Depression
and the Global Financial Crisis. The economic depressions occurred at different times
having been triggered by different circumstances. The Long Depression occurred
between 1873 and the late 1890s and is believed to have been triggered by various
factors including the second Industrial Revolution that resulted in a rise in production
which was unmatched by a rise in the demand levels (Fels, 1949). This triggered major
drops in prices of commodities. The depressions affected different countries in varying
degrees depending on the prevailing circumstances at the time. For instance, France was
hit hard due to the fact that their domestic economy already had liquidity issues after
they were forced to make huge reparations to Germany after losing the Franco-Prussian
war (Rosenberg, 1943).
The Great Depression started in 1929 in the USA and spread to the rest of the
world causing a slump in productivity and soaring unemployment levels across many
countries. According to Madsen (2001), this depression occurred between 1929 and the
early 1940s with countries recovering at different times depending on the fiscal and
monetary policies adopted by the organisations. Countries such as the USA are known
to have been the first countries to recover with the final recovery being made at the
onset of the military mobilisations in the early 1940s that saw governments undertake
major spending thereby ending low production and unemployment (Gauti, 2008). The
Global was triggered by the collapsing of the housing bubble in the USA. This
collapsing resulted in the plummeting of the securities that were tied to the real estate
thereby triggering a downward spiral in the stock markets (Nanto, 2009). This was
compounded by unregulated practices in financial institutions that resulted in high
default rates leading to a liquidity crunch in some of the major banking institutions
(Lewis, 2010). The inability of the financial sector to play its role in maintaining the
economic growth in the USA therefore contributed significantly to the crisis.
The depressions and their occurrence sequences as well as their end have been
discussed at length in the subsequent chapters. The impacts of these depressions on
various aspects of the economies have also been highlighted. This paper also highlights
the similarities as well the differences that characterise these depressions.
2. Overview of the Global Depressions: Periods and Causes
The three forms of economic meltdowns (the Long Depression, the Great
Depression and the Global Financial Crisis) occurred at different times having been
triggered by different factors mainly in the US and Europe.
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2.1. The Long Depression
The Long Depression was triggered in the US during the second Industrial
Revolution in the 1870s that resulted in the supply outgrowing the prevailing demand
(Glasner and Cooley, 1997). As Cameron and Casson (2000) observe, the conclusion of
the American civil war also made a significant contribution to boosting the production
capacity in the US which further aggravated the problem. The period referred to as the
Long Depression started in 1873 and spanned across two decades to about 1896. Even
though it was characterised by low growth and deflation, its impact on the global
economy was pale when compared to the Great Depression which occurred
approximately 30 years from the end of the Long Depression (Musson, 1959). The
period leading to the onset of the Long Depression was characterised by economic
expansion which had shortly followed some major military conflicts. For instance, the
ending of the Franco-Prussian war which ended in France making reparations to
Germany to the tune of 200 million pounds triggered an inflationary investment boom
in Central Europe and in Germany (Rosenberg, 1943). The progress made in rail road
technology further encouraged the growth of industries through the ease of movement
of capital, labour and products.
The early signs of economic crisis that led to the Long Depression were triggered
by a series of events that had culminated in a panic which was brought by the fear of a
bubble in Central Europe after a period of optimism that had been driving a boom in
stock prices in April 1873. This initial panic would then die only to resurrect in the
United States in September of the same year. This panic was initially triggered by the
failure of the bank - Jay Cooke and Company upon their failure to sell bonds that were
supposed to finance the Northern Pacific Railway (Fels, 1949). This bank failure was
soon followed by the failure of several major banking houses occasioning a temporary
closure of the New York Stock Exchange (NYSE) on September 20, 1873 (Rosenberg,
1943). The panic then struck Europe for a second time paralysing the VSE shortly. The
deflation in France is believed to have been caused by the post Franco-Prussian war that
saw France make huge reparations to Germany. The depression may also have been
enhanced by the monetary policies adopted by the United States at the time. This was
done in order to get back to the gold standard and this was being done by withdrawing
money from the circulation hence reducing the amount of money available for trade
(Musson, 1959). This led to the decline in the value of silver- a phenomenon which
further contributed to the fall in the value of assets; in addition to the effect of increased
industrial production.
The overbuilding of railways coupled with the collapsing of weak markets
further enhanced the occurrence of the depression. Following the arising panics,
governments took measures to save money by depegging their currencies. Such an
example was the shift from the use of silver by the North American and European
governments. This crisis was further enhanced by the scarcity of Gold that undermined
the Gold standard. This scarcity of gold was solved to a small degree through the gold
rushes in California in 1848 dubbed the California gold rush, the 1886 Witwatersrand
gold rush and the 1898 Klondike gold rush. Early signs of recovery were cited in the
United States in 1879 when they returned to the Gold standard, effectively putting a
floor to the ongoing deflation (Eichengreen, 1992). The effect of this measure was
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further enhanced by the increase in agricultural production that was witnessed in the
same year.
2.2. The Great Depression
Economists blame the occurrence of the Great Depression on structural
weaknesses that were characterised by massive bank failures and stock markets
(Bernanke, 2000). The Great Depression started in 1929 and lasted until the late 1930s
and early 1940s. It was the most serious economic crisis that occurred in the 20th
century. Like the Long Depression, the Great Depression’s triggering factor was in the
US. It was triggered by the fall of stock prices in between September and October of
1929 culminating into the stock market crash that occurred on the renowned black
Tuesday on October 29, 1929 (Klein, 1947). It thereafter rapidly spread to the rest of the
world. However, critics dispute that the crash was the cause of the Great Depression and
hold the opinion that the crash should be considered as a symptom rather than the actual
cause (Romer, 1992). The 1929 period did not however characterise a steady decline in
market optimism. In fact, there were signs of growth in the early 1930s albeit the
production levels remained below the pre-depression periods. This was however
attributed to an increase spending by governments and businesses. The consumers had
generally scaled down their expenditure after facing losses occasioned by the collapsed
stock market. This was further aggravated by the severe drought that struck the USA in
the same year. The interest rates had fallen drastically by the mid-1930. The dropping of
the interest rates had been done deliberately in order to stimulate borrowing and hence
rejuvenate the economy (Harold and Lee, 2004). However, the market was not keen to
borrow due to anticipated continuance of the ongoing deflation at the time. This
translated into depressed investment and consumer spending. By May 1930, the
automobile industry had begun to feel the effects of the depression with their sales
levels falling below the levels witnessed in 1928 (Rosenof, 1997). Prices began to fall at
around the same period even though wage levels held steady for a while. However, by
1931, deflationary movements had set in with the farming areas being the most
adversely affected. The depression then quickly spread to the whole world with most
countries facing adverse economic recessions. The depression started subsiding
differently in different countries. In most countries, recovery started in 1933. Such
countries include the USA whose recovery started in the spring of 1933. However, the
1929 GNP levels would not be achieved for over a decade with their unemployment
levels falling from 25% in 1933 to 15% in 1940 (Gauti, 2008).
According to analysts, the recovery in the USA was mostly due to large inflows
of gold and not as a result of recovery in the domestic economy. On a global scale,
analysts hold the view that it was the review of the gold standard that helped the most in
bringing about the recovery from the recession (Bernanke, 2000). The rigidity of the
gold standard was relaxed to facilitate the devaluation of currency in gold terms. The
abandonment of the gold standard was quickly adopted by countries across the world
with the Great Britain being among the first countries to do so (Lewis, 2006). It
therefore followed that the countries that left the gold standard tended to recover from
the recession at a faster rate than their counterparts that had done so much later. For
instance, the Great Britain recovered before countries like France and Poland who were
among the last countries to abandon the gold standard (Romer, 1992). The depression
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227
was almost never felt in Asian countries such as China which were still using the silver
standard.
The ending of the Great Depression came at a period where major military
powers were on the brink of a global conflict. The influence of the World War II on the
recovery can therefore not be underestimated (Romer, 1992). Analysts hold the view
that the massive spending by governments is believed to have put an end to the Great
Depression in most countries. However, critics oppose this view even they though they
concede that the pre-war spending did contribute significantly to reduce the levels of
unemployment. The most remarkable reduction in unemployment was characterised by
the 1939 massive redeployments that saw governments engage all available human
resource to aid in their war efforts (Madsen, 2001). The last effects of the Great
Depression were finally wiped out by America’s entry into the war where
unemployment was reduced to levels below 10%.
2.3. The Global Financial Crisis
The Global Financial Crisis can be interchangeably called the credit crunch and
is believed to be the most serious economic recession since the Great Depression of the
1930s (Krugman, 2009). This crisis was triggered by perceived deflation risk
occasioning a rapid reduction in interest rates. This was followed by easy credit;
increased debt burden; sub-prime lending; incorrect risk pricing and reduced liquidity in
the banking system in the USA (Labaton, 2008). This led to the failure of major banking
institutions triggering the onset of the Global Financial Crisis. The crisis was
characterised by major declines in stock markets around the world with most
governments conducting massive bailouts in for major financial institutions and
corporate in an effort to return their economies to optimum levels (Steverman and
Bogoslaw, 2008). The housing in the USA was also adversely affected with prolonged
vacancies, foreclosures, and evictions rising to unprecedented levels. This led to the
severe global recession in 2008. The USA housing bubble had peaked between 2005
and 2006 with prices being higher than the value of the assets (Roeder, 2011).
Figure 1: The Growth of the Housing Bubble
Source: Norris, 2011. Crisis Is Over, but Where’s the Fix?, New York Times, Retrieved
25.06.2011 from: http://www.nytimes.com/2011/03/11/business/economy/11norris.html.
228
Selçuk BALI
The average prices of houses between 1997 and 2006 grew by at least 124%
(Norris, 2011). This bubble could also be observed in the relative prices of housing in
relation to average income levels of consumers with the decade leading to 2001 being
about 3.1 times the consumer income levels. This ratio rose to 4.2 in 2004 and 4.6 in
2006, an indication that the prices were heading towards an unsustainable level
(Merrouche and Nier, 2010). According to Nanto (2009), the housing bubble resulted in
a scenario where home owners opted to refinance themselves by taking second
mortgages. However, by 2007, interest rates had risen and consumers began avoiding
paying mortgages to avoid higher payments. This led to massive defaults by borrowers.
In fact, the number of properties whose payments had been defaulted had risen by 79%
from 2006 to 2007 (Merrouche and Nier, 2010). Another cause of the crisis was weak
and fraudulent underwriting practices. A research indicates that by 2006, over 60% of
all mortgages were not underwritten to the required standards.
Easy credit conditions also contributed significantly to the crisis. According to
New (2010), the reduction of the federal funds rate from 6.5% to 1% allowed banks a
higher level of liquidity to lend. The banks began to willingly give higher mortgage
loans in the confidence that the loans would be repaid with more ease. However, the
increase in interest rates coupled with decline in the price of housing led to an
accumulation of bad debt that greatly impaired the liquidity of financial institutions.
This led to the collapsing of the bubble leading to the plummeting of securities tied to
the real estate damaging financial institutions globally. This was followed by
unavailability of credit and fading consumer confidence that adversely affected the
performance of stock markets around the world (Chan, 2011). This led to adverse
effects on securities in 2008 and 2009. Analysts have also associated the crisis to the
lack of ample regulation by governments that failed to check the practices that
culminated into the crisis.
The question of subprime lending also contributed significantly to the crisis.
Subprime lending refers to the giving of loans to consumers with weak credit histories
and who are likely to default. The value of subprime mortgages as at 2007 was over $
1.3 trillion. This was made possible by both easy credit conditions as well as
government actions. Subprime mortgages remained at about 10% of all mortgages until
2004 and rose to over 20% by the end of 2006. Mortgage delinquency similarly
remained between 10-15% by 2006, a figure which had risen to 25% by 2008 (Donnelly
and Embrechts, 2010).
Figure 2: The Growth of Subprime Lending
Source: Krugman, 2009. The Return of Depression Economics and the Crisis of 2008, New York:
W.W. Norton.
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The liberalisation of the financial sector also saw the rise in predatory lending.
Predatory lending refers to the practice of unscrupulous lenders enticing consumers to
take unsafe loan facilities thereby increasing the chances of default (Steverman and
Bogoslaw, 2008).The prevailing policy in the USA of deregulation in a bid to encourage
investment was also blamed for the crisis. This policy had resulted in limited oversight
over the activities of banks and required minimal disclosure. The role played by
investment banks and hedge funds was also ignored by the regulatory bodies. This led
to a situation where such institutions were not protected against the default of large
loans leading to mass collapse of such institutions leading to slow economic activity
(Chan, 2011).
This crisis triggered a series of government spending that was designed to
rejuvenate the national economies where major financial institutions and corporate
organisations were bailed out in order to reduce the effects of the recession (Norris,
2010). These efforts began to bear fruit between the end of 2008 and mid 2009 seeing
the end of Global Financial Crisis. This crisis may therefore be described as the shortest
global crisis, an attribute that may be associated with the swift actions of the
governments in ending the crisis. However, most of the subject actions were not
sufficient. At this stage, it is possible to say there are important recovery signs at some
areas of the world, moreover there are some important developments, on the other hand
significant problems especially for labor markets of the developed and developing
countries still exist.
Lastly, by today, it is early to state an expression like the crisis is over or it is
coming to an end.
3. Effects of the Depressions
The Long Depression, Great Depression and the Global Financial Crisis had
various effects on the global economy. These effects varied from country to country and
region to region depending on the present economic drivers and national policies
adopted before and during the recessions.
3.1. Production and Consumption
The interaction between production and consumption or demand and supply in
economic terms creates the market equilibrium that determines both the pricing and the
quantity of products in the market (Musson, 1959). Recessions are triggered through a
drastic change in one or both of these key factors. The Long Depression was
characterised by a period of increased productivity occasioned by the second Industrial
Revolution. This increased productivity culminated into a situation where more goods
than demanded were available in the market causing a significant drop in prices
(Glasner and Cooley, 1997). The USA had faced rapid growth prior to the onset of the
depression. In fact, analysts have argued that there was little adverse effect in the USA
during the Long Depression apart from the fall in prices.
Selçuk BALI
230
Table 1: The Industrial Production Growth Rates
Country
United States
United Kingdom
1850s-1873
1873-1890
1890-1913
6.2
4.7
5.3
3
1.7
2
4.3
2.9
4.1
Italy
------
0.9
3
Sweden
-----
3.1
3.5
France
1.7
1.3
2.5
Germany
Source: Cameron and Casson, 2000. Evolution of International Business 1800-1945, New York:
Routledge.
As can be seen in the figure above, the depression followed a period of industrial
growth leading to a drop in prices of products. For example, the five largest producers
of iron had doubled between 1879 and 1890 halving the prices of iron (Fels, 1949).
Similarly, the prices of cotton fell by over 50% in the period between 1872 and 1877.
The amount of money available to consumers was also limited during the Long
Depression. In the United States, the efforts of the government to return to the gold
standard which amounted to a withdrawal of money from the system greatly affected
the amount of disposable income at the disposal of the average consumers hence
resulting in the depression (Eichengreen, 1992). The economic crisis in France was
similarly as a result of a post-war agreement that France had entered into after losing in
the Franco-Prussian war that saw them make large amounts in reparations to Germany
(Rosenberg, 1943). This had triggered the deficit that forced them to withdraw
substantial amounts from the bank of England triggering a serious crisis in their stock
market. Production levels in France were further brought down by the diseases that
impacted the silk and wine industries (Cameron and Casson, 2000). These reduced their
productivity significantly making the effect of the depression stronger in their domestic
economy.
The Great Depression affected production either singly or in combination with
other mitigating factors. For instance, in Canada, the Great Depression combined with
the dust bowl to reduce the levels of production to only about 58% of the 1929
production levels in 1932 (Bernanke, 2000). The drop was also experienced in the Great
Britain with production falling to 83% of the 1929 production levels by 1932 (Romer,
1992). There was a severe decline in the Heavy industry with production falling by 90%
in selected industries such as the ship production industries. However, some levels of
growth were experienced in the production of electrical goods as well as a growing
motor car industry which were supported by a growing population and an expanding
middle class. The period of the Great Depression coincided with a major drought in the
USA which greatly reduced the production of the agricultural produce (Madsen, 2001).
This led to high rates of default on loans secured from the financial institutions. The end
effect was a major collapse of the banking institute with over 5000 banks closing down
over the same period. Many Americans were there rendered homeless leading to the
growth of informal settlements across the country. This prompted the US government to
undertake policy measures to encourage the construction of new homes and reduce
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foreclosures. Efforts were also made to stimulate the economy by providing funds
through initiatives such as public works and the provision of government-secured loans
to the consumers (Gauti, 2008). In Australia, falling export demand led to a sharp
decrease in exports with signs of recovery only being felt after 1932 with the gradual
price increments in products such as meat and wool (Lewis, 2006). The effect on the
Japanese economy was only marginal due with a drop of only 8% in production being
experienced over similar periods (Lewis, 2006). In fact, the Japanese production
capacity is known to have doubled during the 1930s. This was made possible by their
monetary policies that saw their deficit spending channelled towards their military
spending and the control of inflation. Significant spending was also dedicated to
encouraging the growth of local industries.
Similar changes were observed during the Global Financial Crisis which
triggered the drop in production in the financial sectors and other major businesses
globally. This necessitated the bailout by governments on major banking houses as well
as leading companies in order to ensure sustained productivity as was the case with
General Motors in the United States (Strunk and Case, 2008). The reduction of
disposable income by consumers occasioned by the losses incurred in the stock markets,
unemployment and consumer apathy also caused significant drop in consumption levels
further pushing up the effects of the crisis.
3.2. Foreign Trade
Foreign trade was affected by the three forms of economic crises in different
ways. This was mainly due to actions taken by governments to strengthen their
domestic economies. Protectionist policies were adopted by many countries following
the rapid decline of farm prices that were sparked by the Long Depression (Barth,
Trimbath and Yago, 2004). The concepts of free trade were largely rejected with
countries such as France introducing punitive tariffs to curb the inflow of farm produce
from entering their domestic markets. Similar approaches were taken in Germany with
Italy entering into a bitter tariff war with their French counterparts. Political events were
also greatly influenced by the Long Depression with Benjamin Harrison winning the
USA presidential election on the promise of pursuing protectionist policies (Glasner and
Cooley, 1997). Only two countries namely the United Kingdom and the Netherlands
had maintained their low tariffs during this period. The significance of these measures
was felt in the global merchant marine fleets which are known to have experienced
dismal growth during the Long Depression with a boom only been experienced prior to
the global military crisis that ensued.
The Great Depression also led to the occurrence of similar drops in international
trade. The Australian economy was greatly affected by falling international demand
which greatly reduced the amount of farm products and textiles that they could trade
internationally (Lewis, 2006). Canada on the other hand employed very stringent
immigration policies that greatly restricted the movement of human capital across their
borders (Madsen, 2001). This was followed by perceived hostility towards foreign
products, a move seen as essential on promoting the growth of local industries. In Chile,
export earnings dropped significantly with the earnings dropping by 27% from the
levels experienced in 1929. According to a survey done by the League of Nations, Chile
is believed to have been the hardest hit by the Great Depression. This is because Chile
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had at the time been relying copper and nitrates exports which had been accounting for
a whooping 80% of the government revenue (Harold and Lee, 2004). This shock
prompted the Chilean government to seek measures that could strengthen their local
industries in order to cushion themselves from any likely negative developments in the
international markets. By 1939, the Chilean government had put in place mechanisms to
provide local industries with subsidies as well as directing investments in strategic
industries (Rosenof, 1997). Protectionism also took centre-stage with most tariffs being
hiked in a bid to prevent the entry of cheaper products. This measure was similar to the
one taken by most of the other Latin American states. This greatly impeded
international trade. The effects of the Great Depression that were felt in France paled in
comparison to other countries in Europe and the USA. The French economy had been
quite self sufficient and was therefore not greatly affected. However, there was
experienced a rise in the levels of unemployment which caused grave political
upheavals at the time. Perhaps on of the countries that seemed to register relative gains
as a result of the Great Depression was Japan. Having pursued monetary policies that
saw their inflationary pressures stabilised and their currency undervalued, the Japanese
products became more affordable in the international markets and were able to displace
the British textile products from the international markets. This greatly contributed to
Japan’s recovery with analysts holding the view that the country was out of recession by
1933 becoming one of the first countries to pull out of the depression (Bernanke, 2000).
The United Kingdom was the most significantly affected by the Great Depression which
in one way or another ended their economic dominance as evidenced by their leading
corporate organisations around the world. The UK experienced a sharp decline in
exports occasioned by falling international demand. By 1932, the export earnings in the
UK had already dropped to 50% of the pre-depression period (Harold and Lee, 2004).
This would not recover until the onset of the World War II. The introduction of
protectionist policies in the USA was signalled by the approval of the Smoot-Hawley
Tariff Act which was intended to raise tariffs on most of the imported goods. The aim of
this act was two fold: it helped increase government revenues; and it helped encourage
the consumption of American made products by making imports more expensive
(Gauti, 2008). This measure was however taken negatively by America’s trading
partners who introduced retaliatory measures. This further impaired international trade
and led to the worsening of the depression.
The Global Financial Crisis is the most recent of the three forms of economic
recessions that took place in different periods. This crisis was triggered by a collapse of
the real estate which was triggered by the collapsing of the housing bubble in the USA.
The falling international demand saw a sharp decline in the export earnings in most
countries with most of them experiencing nil or negative economic growth during the
same periods. The effects of this crisis on the real sector needs to be emphasized,
especially its effects in the developing world deserve attention. In Table 2, it is tried to
show the relation between the percentage changes in export income and growth rates in
2007 and after, especially by 2009 in which the crisis deepened.
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Table 2: Export Earnings and Economic Growth
Country
Earning 2007
(Billion $)
Earning 2009
(Billion $)
Growth 2007
(%)
Growth 2009
(%)
Algeria
55,6
43,7
4,5
2,2
Bulgaria
8,5
4,3
6,2
-5
Georgia
2,1
1,8
12
-3,9
Pakistan
South
Africa
Taiwan
19,2
18,3
5,3
4,1
20,6
11,3
5,1
-1,8
215
203
5,7
-1,9
Source: www.indexmundi.com/g/g.aspx?v=66&c=ag&l=en (Retrieved 02.05.2012)
The Global Financial Crisis may be seen as the spotlight that shed light on the
global nature of economic systems with the focus shifting towards cooperation between
foreign governments in regulating the financial practices in their respective domestic
economies. The efforts of the USA government in bailing out their failing financial
institutions were accompanied by calls for other countries especially those in Europe to
do the same. This was in recognition of the fact that the economies were integrated in
such a way that no meaningful recovery could be made where some major economies
remained behind. Weaknesses of the financial regulatory frameworks were also
focussed upon with international cooperation witnessed in the pursuance of sound
policies to employ in ensuring the structural weaknesses that had the plunged the world
into the crisis was amply dealt with. Countries that have been known to maintain tax
havens and a measure of secrecy in their banking systems were called upon to pursue
transparency and accountability measures, a recommendation that most of them agreed
to after considerable international pressure (Nanto, 2009). This was viewed as one of
the measures to encourage financial accountability across the world- given the global
nature of financial transactions that had seen the movement of capital and money move
across national borders almost unchecked. The drop in international trade was however
purely due to falling international demand. Countries across the world seemed reluctant
to pursue protectionist policies in fear of retaliation from the trading partners (Kohler
and Chaves, 2003). Analysts view this factor as one of the main reasons for the quick
recovery. As would be observed, the Global financial crisis barely lasted for 2 years.
This pales in comparison to the other depressions which spanned across decades and
brought prolonged human suffering, presumably due to the engagement of protectionist
policies that gravely impaired foreign trade.
3.3. GNP and GDP
One of the ways of monitoring the impact of various phenomena in an economy
is through the monitoring movements in the Gross Domestic Product as well as the
Gross National Product.
The Long Depression saw a steady decline in the GDP and GNP of most
countries in Europe. The French economy was greatly affected by failing international
ventures mainly in the rail roads. The French recorded a steady decline in their net
national product over a period of ten years that ended in 1892. The impact in the USA
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was unlike other countries due to the fact that production in the USA was on a steady
rise. Analysts hold the view that the USA only suffered depression in profits during the
Long Depression. The net national product was on a steady increase at a rate of 3% per
annum from 1869 to 1879. The real national product also registered growth at the rate
of 6.8% in a similar period. The per capita net national product was however
undermined by the population growth in the USA which stood at 17.5% over the same
period of time (Musson, 1959).
The Great Depression was similarly characterised by slowing growth in GDP
and GNP. In Canada, the total GDP fell to 56% of the pre-depression levels. The effects
felt in Chile saw their GDP fall by 14% with their mining income dropping by 27% and
their export earnings taking a dip by 28%. The Japanese economy shrank by a dismal
8% (Gauti, 2008). It was one of the least affected economies by the Great Depression.
These minimal effects were facilitated by the proactive measures taken by the country
through deficit spending that was channelled towards military spending and stimulating
investments. The Soviet Union managed to escape the adverse effects of the depression
thanks to their newly embraced Marxist principles in the running of their economy
(Bernanke, 2000). In the UK, falling GDP and GNP was mainly as a result of declining
international demand as well as the better performance of Japanese exports in markets
that were previously a reserve of the Great Britain.
The Global Financial Crisis also caused similar effects in the global economy.
Most countries that had been on a stable growth rate experienced stagnant growth with
most countries experiencing a fall in the GDP. For instance, the first quarter of 2009
saw the annual rate of GDP decline in Germany rise to 14.4%. The rate in Japan was
15.2% with the UK experiencing a 7.4% decline over the same period. Statistics also
indicate that the Euro area, Latvia, and Mexico exhibited declines at the rates of 9.8%,
18% and 21.5% respectively (Merrouche and Nier, 2010). Similar movements were
observed in some of the developing countries whose steady rates of growth greatly
reduced or were ground to a halt as a result of the Global Financial Crisis. An example
is the Cambodian economy whose GDP growth rate reduced to zero from a strong 10%
in 2007 (Chan, 2011). These GDP reductions may be attributed to falling demand that
led to falling trade levels, reduction of investments, falling commodity prices, and a
reduction of remittances by migrant workers.
3.4. Stock Exchange Indexes
Stock markets provide a reliable indicator of the economic well being of most
economies. It is therefore one of the markets that often signal the starting or end of an
economic recession.
The Long Depression was first detected upon the collapse of the Vienna Stock
Exchange (VSE) which prompted its temporary closure on May 10, 1873. Upon
reopening, a temporary return of confidence was experienced. The economic panic
would later hit the USA as evidenced by the collapse of the NYSE in September of the
same year (Glasner and Cooley, 1997). This was then followed by a second collapse of
the VSE signalling the beginning of the Long Depression. The stock market indicators
were also useful in signalling the beginning of the Great Depression of the 1930s. The
stock market crash of October 29, 1929 on the infamous black Tuesday signalled the
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235
beginning of the Great Depression. Similar observations can be made about the Global
Financial Crisis. Even though the genesis of the recession was the housing bubble in the
USA, the crisis was only triggered after the crisis hit the stock markets. The collapsing
of the housing bubble resulted in the plummeting of securities that were tied in to the
real estate. These resulted in rapidly falling stock market indexes across the world. The
US stock market had been at its best performance in 2007 with the Dow Jones Industrial
Average index topping the 14,000 point mark. This index rapidly declined to a low of
6,600 points in 2009. This was clear indication of the economic decline over that period.
This index had recovered to top 12,000 points in the first half of 2011 indicating a
likelihood of complete recovery. Stock market indexes provide reliable indicators of
economic performance as can be illustrated by the poor stock market performances over
the last global economic recessions. For instance, the stock market index in the USA
dropped by 54.7% in the first 17 months of the Great Depression with a subsequent fall
by about 89% over a similar period of time (Krugman, 2009).
In Table 3, it is tried to show the figures of the period of 2007 (when most of the
stock exchange market reached the highest level all over the world), 2009 (when the
crisis deepened at most of the countries) and today. At this stage the reason why the
Long Depression and Great Depression are not mentioned is because for the subject
period there is not enough comparative stock exchange market index datas found.
Table 3: Stock Exchange Indexes
Country
2007
2009
5/2012
United States (Dow Jones)
14164
6547
12529
United Kingdom
1989
368
1010
Germany (DAX)
8151
3588
6250
Italy
28500
17215
12380
3.5. Unemployment
Recessions are closely related to unemployment levels due to their ability to
influence the amount of human capital that can be engaged in production. Declining
demand forces organisations to scale back their levels of production making it necessary
to lay off some of the human capital resulting in unemployment (Klein, 1947). General
trends can be observed in the rise of unemployment levels in most countries during
global recessions.
The Long Depression shows that about 25% of the American workers were out
of work in the period spanning between 1873 and 1874 with a national tally of 1 million
people becoming unemployed over that period alone (Eichengreen, 1992). The
unemployment effect in the Long Depression was however not as severe as that in the
Great Depression and the Global Financial Crisis due to the fact that the Long
Depression had been occasioned by increased production occasioned by the second
Industrial Revolution. The Great Depression caused the rate of unemployment in
Australia to reach the record highs of 29%. This rate resulted in the rising incidents of
civil unrest occasioned by rising frustration among the consumers. Similar trends were
observed in Canada with the unemployment rates rising to 27% in 1933 (Romer, 1992).
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The rapid drop in the Chilean GDP also resulted in sharp rises in the rates of
unemployment by 1932. The Great Depression also signalled the stopping of the USA
funds that were being donated to help rebuild the German economy causing Germany to
face the full brunt of the depression. Unemployment rates soared with the most
unemployed persons being concentrated in the larger cities. The unemployment rate in
Germany topped the 30% mark in 1932. Similar trends were observed in the UK where
20% of the insured workforce had lost their employment by 1930 (Bernanke, 2000). By
1933, 30% of the Glaswegians had joined the ranks of the unemployed with
unemployment rates in selected cities topping 70% occasioned by a 90% decline in ship
production. The USA was also hit by unemployment during the Great Depression. The
unemployment rates rose from 23.6% in 1932 to over 25% in 1933 (Gauti, 2008). This
led to a decline in the disposable incomes in the economy and a rise in the default rate
in the financial institutions, a situation that only worked to worsen the severity of the
depression. The recovery in the US economy was achieved by the 1936 even though
unemployment rates remained a little higher than the pre-depression period at around
19% (Madsen, 2001). The USA government introduced various programs to deal with
unemployment, a measure that resulted in the dropping of unemployment to just about
2%.
Similar trends were observed during the Global Financial Crisis. The massive
failures by banking institutions and other businesses made it necessary for the
businesses to conduct massive layoffs that led to a sharp rise in the unemployment
levels on a global scale. The rate of unemployment had risen to 10.1% by 2009. This
was the highest rate or unemployment in the USA in a period of three decades. Massive
layoffs were also witnessed in much of Europe with the UK and Germany raising their
unemployment rates significantly. Global unemployment levels are estimated to have
affected about 210 million people in 2009, a 30 million increase from the 2007 levels
(Norris, 2011). This led to the introduction of empowerment policies aimed at
cushioning the economies against the effects of rising unemployment. Such measures
included wage subsidies, tax reductions, and direct job creation efforts.
3.6 Real Wages and Wealth
Real wages were affected adversely by the Global Financial Crisis with most
of the developed countries recording negative growth rates in the year 2009. This
movement is however varied and is determined by the stage at which the countries
mentioned were in the recovery path at the time of the data collection.
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Table 4: Real Wages and Wealth
Location and
Type of Country
1
2
3
4
5
6
7
8
9
10
Country/Territory
Europa - Advanced
France
Country
Europa - Advanced
Germany
Country
Asia - Advanced
Japan
Country
Asia - Advanced
Korea (Republic of)
Country
Europa - Advanced
United Kingdom
Country
America - Advanced
United States
Country
Africa - Newly
South Africa
Industrialized Country
Asia Newly
China
Industrialized Country
Asia - Advanced
Hong Kong (China)
Country
Latin American and
the Caribbean - Newly
Mexico
Industrialized Country
Growth of Real
Average Monthly
Wages, in % p.a.
2000-2005
Growth of Real
Average Monthly
Wages, in % p.a. 2009
0.6
-0.8
-0.4
-0.4
0.7
-1.9
4.4
-3.3
2.3
-0.5
-----
1.5
-----
3.5
12.6
12.8
-----
-2.9
3.3
-5
Source: Donnelly and Embrechts, 2010. The Devil is in the Tails: Actuarial Mathematics and the
Subprime Mortgage Crisis, ASTIN Bulletin, 40(1), 1-33.
Recessions often result in the net worth of investments in any given economy. A
glimpse into the developments in the USA reveals that an average of 25% of the net
worth of the players in the US economy had been lost by November 2008. This was
followed by a 45% drop in the S&P 500 Index from its 2007 levels (Donnelly,
Embrechts, 2010). The dropped of the prices in the housing industry was also an
indicator of the loss of the net worth of the real estate owners in the economy. Total
Home equity dropped from $ 13 trillion to $ 8.8 trillion between 2006 and the mid-2008
(Nanto, 2009). Similar trends were observed in the value of retirement assets whose
total value dropped by 22% from $ 10.3 trillion to $ 8 trillion within a similar period.
The estimated total loss of value for assets in the US market is estimated at $ 8.3
trillion.
3.7. Politics
The influence of politics and government is crucial in determining the ease with
which economies can recover from economic downturns. This is in line with the
Keynesian economists who hold the view that government policies must of necessity be
employed to ensure that the economies function at their optimum (Klein, 1947).
Democracies worldwide made decisions based on the policy inclinations of the
candidates vying for elective offices. An example of the influence of political
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inclinations is viewed in the manner in which countries around the world dealt with the
various recessions that hit at different times. For instance, the tendency towards
nationalism was common with the majority of the populations preferring to elect leaders
whose policies leaned towards the protection of the domestic markets (McMurtry,
1999). The influence of this inclination can be observed in the manner in which most
countries took to the adoption of protectionist policies after the Long Depression and
the Great Depression. For example, in Germany, popular revolts took place to protest
the entry of cheap products into their economy. This forced the president in 1879 to
adopt protectionist policies in line with the wishes of the German citizens. Similar
patterns were observed in France where President Adolphe Thiers was forced to prove
his reform credentials by doing away with the free trade preferences of his predecessors
(Rosenberg, 1943).
In the USA, protectionist policy formed the thrust of the campaign policy in the
1888 presidential election. President Benjamin Harrison was elected on the basis that he
would seek to protect American industries by pursuing protectionist measures
(Rosenberg, 1943). Unemployment level is also one of the key political issues that
transcend the confines of economic status. Political leaders around the world have on
oft times been hard pressed to do everything in their power to ensure that
unemployment levels are reduced to the bare minimum. This debate has often been one
of the key campaign issues in most democracies in the world. Unemployment and
indeed economic stagnation has in many cases resulted in civic unrest- a key concern
for political leaderships across the world. A good example is the Australian civic unrest
of 1932 which were done to protest rising unemployment and poor economic conditions
(Lewis, 2006). The rise of the socialist popular front in France was also triggered by
unemployment and poor economic conditions (Rosenberg, 1943). This explains why
politics is part and parcel of economic management. Any failure to resolve arising
issues amicably often leads to serious repercussions from the voters. Having taken the
decision to abandon capitalism and adopt Marxist theories in the running of their
economy, the Soviet Union was largely unaffected by the economic crisis. The
countries that were hit hard were mainly those that had embraced capitalism in the
management of their economies. The influence of political mindsets is also evident in
the manner in which the Global Financial Crisis was dealt with in the late 2000s.
Having come at a time when globalisation was gaining acceptance around the world,
there was little pressure to pursue protectionist policies (Krugman, 2009). The end
result was a coordinated effort that saw most developed countries taking similar policy
measures to alleviate the effects of the financial crisis and to strengthen regulation in the
financial institutions in order to minimise the chances of such causative bubbles in the
future.
3.8. Similarities and Differences
The Long Depression, the Great Depression and the Global Financial Crisis have
several factors in common. To start with, these three recessions originated from the
USA and Western Europe. The Long Depression was triggered by an economic panic
that saw the rapid decline in the NYSE as well as the VSE (Musson, 1959). The crisis
mainly affected the developed world with some countries such as Japan only facing
marginal impacts on their economy. The Great Depression was also triggered by the
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collapse of the stock market in the USA (Gauti, 2008). This triggered an economic
meltdown that quickly spread across the world only to end at the onset of the major
military conflicts of the 1940s. The Global Financial Crisis was also triggered in the
USA by the rapid devaluation of securities that were tied to the real estate due to a
collapse in the bubble in the housing sector. This triggered massive closures of major
businesses and financial institutions as well as a crippling of the financial sector
prompting the government to engage in massive bailout programs for the affected
businesses. The second similarity is that the effect of the recessions was felt worldwide.
Even though the crises started in a particular part of the world, the effects were felt
globally. The decline in consumer demand affected the international market leading to
depression even in countries that had little to do with the crisis. This can be observed in
the seeming uniform movement towards the increase in the rates of unemployment in
different countries around the world. The slowing in the growth of GDP was also felt
globally with most countries either facing a decline in GDP or slowing growth. For
instance, during the Great Depression, the UK economy experienced a 50% slump in
GDP while Cambodia saw its growth fall for a 10% growth rate in 2007 to zero in 2009
(Chan, 2011). The other major effect of the recessions that is common to the three
recessions is in the manner that they have highlighted the role of politics and political
leadership in the economic management in various countries. Issues to do with
unemployment and suppressed economic growth go to the heart of the welfare of the
societies. This fact informs political debates around the world with the candidates seen
to be most capable of managing the economies often getting the big nod from the
voters. The interventions by governments further underscore the fact that the operation
of free markets can not be entirely left to the market due to certain market inefficiencies
that may inhibit the performance of such markets as desired (Klein, 1947).
The three crises were however caused by different circumstances and lasted for
varying periods of time. The Long Depression was caused by a panic in the markets
followed by advancement in production techniques that saw the level of products
available in the market surpass demand for such products (Glasner and Cooley, 1997).
An example is the doubling of iron production which led to the halving of the prices.
The Long Depression was triggered by a series of events which alternated between the
USA and Europe. The Great Depression on the other hand was triggered by a crash in
the US stock market in a categorical event on the renowned Black Tuesday (Gauti,
2008). This categorical event market the onset of the Great Depression which quickly
spread to the rest of the world. Even though the Global Financial Crisis was closely
linked to the decline in the US stock market, the underlying reason was mainly the
bubble in the housing sector and unregulated practices in the banking sector that saw a
rise in defaults leading to a credit crunch in the financial institutions. The periods that
the recessions lasted also varied significantly. The Long Depression spanned across two
decades from 1873 to the late 1890s (Fels, 1949). The Great Depression also spanned
across a decade having been triggered in 1929 and ending in the early 1940s (Romer,
1992). On the other hand, the global economic crisis struck with a ferocity not
witnessed in the previous two global recessions. The other major difference can be
observed in the approaches that the countries affected chose to deal with the crises.
While protectionist measures were taken in response to the Long Depression and the
Great Depression, policy makers around the world sought to create an atmosphere of
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international cooperation in recognition of the fact that faulty financial systems in one
country could potentially adversely affects economies beyond its national borders.
At tis stage, the Great Depression and the Global Financial Crisis will be
compared, but the Long Depression will be held out of evaluation except one point.
This has two basic reasons: First one is that the Long Depression followed different
process and ended in different periods, at different countries. For example, while in
1879 American economy returned to its old condition, in United Kingdom since 1896
there was not any distinctive healing. Secondly, we don’t have enough healthy data
about the Long Depressiın to make comparisons.
Below the studies of Rogoff and Reinhart (2011), Bordo,Goldin and White
(1998) and Cecchetti (1992) are put into account and following a general evaluation is
put forward.
While, the Long Depression spread to whole world after a collapse at the VSE
initially, both the Great Depression and the Global Financial Crisis were American
rooted and then they became global events.
While industrial production reaches the peak in July 1929 and December 2007,
both two crises started in 12 months after the peak level. When we look at the world
trade volume angle, the regression which has lived at the beginning of the Global
Financial Crisis was faster compared with the regression of Great Depression. On the
other hand, while protective measures were taken to protect domesti market in the Great
Depression, no such regulations were made in the Global Financial Crisis.
When we look from the angle of money and finance politics, while in the Great
Depression process the implimented finance policy was surprisingly good working, in
the present crisis period the money policy is more effective. In the period of the
continuing from the angle of rapid implimentation of and effectiveness important
implimentation were lived for both of the policies and by June 2011 international
industrial product and trade became more stabil.
When ongoning crisis, the regression of industrial production was lower than
the Great Depression. In Great Depression period the industrial production was denied
in European and North American countries basicly, however today, addition to these
countries, Latin American, Asian and the rest of developing countries. In the Great
Depression period, the decrease in 1929-Q4 and 1932-Q3 period was 36%, on the other
hand in the 8 month period pf April 2008-January 2009 the decrease was 20% and that
was all.
Where theme were two collapses in the Great Depression (the second was in
1931), today such a situation does not occurred yet.
In the ongoing the Global Financial Crisis period, the currency regimes of all big
economy countries. In the first group, the countries who make regulations with money
councils (Hong Kong and Bulgaria), in the second group the ERM II countries whose
domestic currencies move related to the other currencies (Denmark and Baltic
Countries) take place. On yhe other hand, in the Great Depression, the countries who
were dependent to gold standards could not be able to develop money policies and
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forced to make financial regulations. At this period, various implementations such as
gold block and sterling areas took place.
The evaluation is continued in the distiction of USA who is mentioned as the
biggest economy of the world, it is possible to make this short one: In the Great
Depression GDP decreased to 27% and the general level of prices decreased to 25.5%,
and unemployment rate increased to 25.2% from 3.2%. Stock Exchange Market
decrease to 41 from 381, in other words there was a loss of 90%. With the conjunction
of the Global Financial Crisis in the period of December 2007-October 2009 GDP
decreased by 4.1%, general level of prices increase by 2.5% and unemployment rate
increase to 10.1% from 5%. Stock Exchange Market decreased to 6000 from 14.000, in
other words there was a loss of 58%.
4. Conclusion
Depressions are known to cause adverse impacts on the economies affected.
These effects are often felt in the changing rates of unemployment, falling levels of
productivity, low or declining GDP and GNP, as well as suppressed prices of products.
The three major global economic recessions namely the Long Depression, the Great
Depression and the Global Financial Crisis are known to have affected the globe
irrespective of the cause of such depressions. The Long Depression which mainly
affected the USA and Europe is believed to have been caused by increased production
which saw supply exceed demand leading to general falls in the price levels. The Great
Depression on the other hand is believed to have been characterised by rising levels of
unemployment and reduction in the productivity levels across the world with most
countries experiencing significant declines in their GDP. The Global Financial Crisis on
the other hand mainly affected the financial institutions with the effect quickly spilling
over to stock markets across the world. The short-lived crisis led to high levels of
unemployment as well as falling productivity, a phenomenon that forced governments
across the world to engage in deficit spending in a bid to rejuvenate their economies. It
also helped underscore the importance of taking coordinated actions across national
borders as well as the importance of maintaining free trade even in the face of economic
crises.
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